MONEY 12 - U.S. ECONOMY

THIS IS MY TWELFTH POST ON UNDERSTANDING MONEY TOOLS

THE ECONOMY

Recently a good friend wanted me to comment on a site going around on the internet by an accountant about our economy and the financially desperate situation we are in.  Bottom line, finances can’t add up in the long run.

Of course, I like to render my opinion on such things. With personal subjectivity on this topic, I don’t believe it greatly matters now who is president as we reached the point of financial “no return” to what we knew as “normalcy” in the US and the world. 

When did it appear to go overboard with no return? I would say 2005-6.  Two wars have been financially disastrous with some reports that total costs from these wars will add up to as much as $3.75 trillion by 2017, plus the most important loss, and that is the brave men who lost their lives and the injured.  Did our politicians learn nothing from history?  Did they not read books on wars, the length of wars, and the disastrous effect of long wars, written about people like Napoleon Bonaparte, Winston Churchill, Adolf Hitler and others?

We have such debt and future obligations of debt that we can never grow the economy and gross domestic product (GDP) fast enough to pay the interest on our debt let alone balance a budget and pay down debt.

The Federal Government can cut employment and expenses, however they will push the burden down the pyramid, and the next layer is to the states.  Then, the states will plead “no money” and push the burdens down to the counties and from there to the cities.  Already, you have cities in California and Pennsylvania that have declared bankruptcy. The entire US system has signed up for debt obligations of around $100 trillion dollars. As you cut jobs that decreases cash flowing through our economy resulting in lower GDP.

These are only the public sectors not being able to afford to operate as they have done in the past.  Look at corporations under-funded pension plans.  For many years corporations have taken money from their pensions for operating capital pledging in place their public stock.  When the stock market retreats and the stock drops from the stock’s original cost basis the pension is under-funded.

These corporations have lawyers draft pension plans leaving out “non-alienation language”.  This clause states that the trust shall not be able to be penetrated by outside entities except for the US Government.  A good example of a corporate pension falling to the wayside was Pabst Brewery in Milwaukee, Wisconsin.  The Pabst Brewery was failing, some say stripped of assets. Then, the pension money was taken, a class action suit followed by employees and past employees.  The employees lost in court, and their pensions and health care were gone.

As I remember in this situation the pension stated that the company would provide as long as the company could afford to do so.  As the company was folding, the pension money was taken, and the owners could do so within the framework of the law. A big question here is the moral and ethical obligations in the business world between the employer and employees.

Bottom line is that in the future everyone is going to have to compromise.  The rich will need to pay more in taxes, employees will not be able to get the same retirement benefits they did years back, cities and counties will not be able to offer some of the niceties they have in the past….wonderful care of public parks, golf courses, perhaps not the same degree of fire and police protection, etc. 

With cuts and no alternatives there will be more people seeking jobs.  We need to create higher paying jobs in the US, and start encouraging new and small business here, jobs that are not going overseas.  To do this the government needs to get a reality check on bank lending regulations and ease up, yet not going back to the 2002-4 lack of banking regulations.

No country has ever survived without major restructuring after debt to asset ratio exceeds a certain point, and that point has been exceeded by many countries including the US, Japan, France, Greece, Italy, Spain and so many more.

Cutting expenses and austere measures is kind of like medical surgery, when Greece cuts expenses its minor surgery and we don’t feel it, however when it happens in the US and to us, it is major surgery and painful even when the procedure is the same.

In the long run we may luck out from our Federal Reserve Bank buying our US debt obligations.  Perhaps the US will still be the safest place to put money and our US bonds will go up significantly in value thus making the Quantitative Easings (QE1, QE2, QE3) a great investment idea!